Government wants Chevron to pay more income tax on oil

With billions of dollars in potential offshore oil at stake, an Indonesian company

reported that it has made a $4.5 million payment to the "social development

project fund" in Cambodia in order to obtain its contract for one of the six

blocks now licensed for exploration off Sihanoukville.

Unlike most of the offshore licensed players, Medco International Petroleum Ltd.,

of Indonesia, which trades on the Jakarta stock exchange, has been open about the

fee and the license deal it and its partners from Kuwait and Sweden signed with the

Cambodia National Petroleum Authority (CNPA).

The license is based on a model contract developed when CNPA first licensed Block

A to Chevron and its partners in 2002. It discusses the split of royalties with the

government and the tax rates. The model contract has one clause open for negotiation

that deals with the split of royalties after exploration and production costs are

covered.

However no "social development project fund" is in the model contract.

Asked about it, Minister of Information Khieu Kanharith said the Post should talk

to Deputy Prime Minister Sok An, whose Council of Ministers oversees the CNPA. 'He's

in charge," Kanharith said.

An official answering Sok An's office phone said that the minister was busy. The

official hung up without answering a question.

For the last year while Chevron has been drilling exploratory wells in its Block

A, CNPA and Sok An's office have been quietly handing out licenses to a raft of exploration

partners, including some odd ones.

One license is now held by a Chinese penny stock operator. Another is held by a Hong

Kong company with no apparent oil business.

Tax problem

Te Duong Tara, head of the Cambodia National Petroleum Authority, declined to be

interviewed for this story. But reached by phone he said one of the reasons he is

too busy to discuss the licenses is that there is a "controversy" surrounding

the tax law with regard to the way oil companies will be taxed on eventual royalties.

"We still have some problems with the law on tax. We have to ensure that the

tax would be appropriated, otherwise the companies will withdraw from Cambodia,"

he said.

He was referring obliquely to a tax dispute CNPA is having with Chevron. Another

official who asked not to be identified said Chevron has been exploring offshore

with a 2002 license contract that pre-dates a 2003 amendment to the Tax Law of 1997.

The amendment substantially raises the level of corporate income tax that oil producers

would ultimately have to pay the government if production gets underway. The new

licenses include the tax rate of 30%; Chevron's rate is lower.

Chevron officials declined comment on the tax negotiations.

They gave the Post a written statement that repeated that they are "working

hard" and "pleased to be working" with the government.

"Chevron is pleased to be working with the Royal Government of Cambodia to evaluate

the country's petroleum resources and to find solutions to Cambodia's growing demand

for energy," the statement said.

Chevron and its partners "are working closely with the Royal Government of Cambodia

to complete the fiscal and legal framework that will be required for the development

of petroleum resources in Cambodia," the statement said.

The partners have "been working hard to find a solution to develop the complex

reservoir and we are in the process of evaluating development options," it said.

The statement also confirmed that Chevron has drilled a total of 15 exploratory wells

that "confirmed the presence of hydrocarbons, however, the oil and gas reservoir

is characterized by small dispersed fields rather than one core field."

As a result of the dispersed hydrocarbons, the company said a third drilling campaign

is "under consideration for late 2008-2009."

A petroleum official said it seemed unlikely that Chevron would withdraw from Cambodia

because it is possible to negotiate a solution to the dispute.

The government has not disclosed any official information about the licensing of

its oil exploration partners. This is contrary to the Petroleum Law of 1991 that

specifically calls for open notice of invitations for bid.

An investigation by the Post found that the exploration licenses for five other blocks

licensed after Chevron have been shielded from public review and in some cases given

to operators with doubtful qualifications.

Not all the license deals appear shady.

Two large international oil groups of partners hold the rights to Blocks B and E,

following the model contracts developed in 2002 for Chevron. It could not be determined

however if any other companies besides Medco were required to deviate from the model

contract with extra fees for the "social development project fund."

Asked whether Singapore Petroleum Company (SPC) which holds the rights to Block B

with partners from Thailand and Malaysia had to pay such a fee, the company's spokesman

told the Post "Sorry, I'm not aware."

Chinese blocks

The other three blocks went to the Chinese in quiet deals. None of the companies

could be reached for comment.

The license deals have been kept secret by the petroleum authorities and the government.

It could not be confirmed whether or not the government deviated from the model contract.

Stephane Guimbert, World Bank Sr. Country Economist, said that although he has met

with CNPA regarding its work in "clarifying the legal framework" for the

oil partners, specifically the 1991 Petroleum Law and the 1997 Law on Taxation, the

World Bank had not received information about the licenses.

Meanwhile offshore, not much exploration is taking place in the oil fields, except

for Chevron's.

Oil experts told the Post that this is not particularly surprising because the contracts

for exploration give the companies several years for exploration.

One expert who is familiar with the exploration but asked not to be identified said

he didn't expect to see much activity offshore until Chevron announces its plans.

"They're gambling. Very often they sit back and wait and see if there are any

hits," he said.

He explained the strategy is to wait and see the results of Chevron's work-according

to the CNPA Chevron had already invested over $120 million by early 2007-and then

decide whether to drop out or re-sell their license.

A petroleum consultant added that it would not be surprising to see companies simply

carry out their seismic surveys and if the results are positive, sell the licenses

to more serious investors. "They have three years to drill exploration wells

and then another two years to analyze," he noted.

It is also not the first time Cambodia has licensed the blocks offshore. Back in

the 1990s wildcat exploration was ongoing in the gulf. But with oil prices much lower

then, the findings weren't commercially viable and the companies left.